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Daniel Hainsworth on infrastructure and the Channel Islands

With major infrastructure projects springing up around the world, the Channel Islands are playing a significant role in making sure that they are well funded. Client Director Daniel Hainsworth weighs in.

What do the National Grid’s UK gas pipeline network, hospitals in Africa,
and sewerage and water treatment plants in the US have in common?

The answer is that they’re all financed through infrastructure investment
funds that are domiciled in the Channel Islands. And it’s very big business
indeed – with massive projects in need of construction and maintenance
around the world, and a tidal wave of money keen to fund them.

The numbers are staggering. In order to meet the infrastructure needs of a projected global population of around nine billion people by 2040 – just
22 years from now – the World Bank forecasts $97trn in investment will be
required. This includes meeting the United Nations Sustainable Development
Goals that aim to provide universal provision of clean water, sanitation and
electricity to people around the entire world. The World Bank also reckons
there will be a funding shortfall of $18trn.

This is where the need for private investment capital is particularly
important and where infrastructure investment funds have a critical function
to perform. They play the role of platforms where capital is raised from
investors by fund managers who deploy it to fund major projects.

Macquarie Infrastructure Corporation, for example, has raised a series
of funds that have invested in airports, seaports, and power and energy
facilities. iCON has several funds that have invested €2.5bn in water,
transport, energy generation, storage and distribution assets across Europe
and North America. And Abu Dhabi fund manager Mubadala Infrastructure
Partners invests in a variety of infrastructure and development projects in
the Middle East, North Africa and Turkey.

These are just three of the largest infrastructure fund sponsors whose funds
were structured through the Channel Islands. There are quite a few more.

On the funding side, there’s great investor interest in infrastructure, as
David Crosland, a Partner and infrastructure fund specialist at law firm Carey
Olsen in Guernsey, explains. “Infrastructure funds are particularly popular
with pension funds. The big state pension funds in the UK, Canada, Korea, US
and Australia like them because they’re asset-backed and produce predictable,
steady income streams.”

Investors such as pension funds, insurance companies or sovereign wealth
funds typically have long-term obligations to meet, such as paying pensions to
private individuals. They look for income from the funds in which they invest
that stretch over years, in some cases decades, to match such obligations.

And, of course, projects involving large
capital investments in power generation
and delivery, airports, hospitals and public
transport assets, which have long, useful
lives, will often be state-supported and
form the vital infrastructure backbones of
the countries in which they are located –
the UK National Grid, for example. The
match between such infrastructure and
institutions makes a good fit.

Why the Channel Islands?

Although modest in their own
infrastructure needs, Guernsey and Jersey
play a pivotal role in achieving the match
between projects and capital. Darren
Bacon, a Partner at law firm Mourant
Ozannes, sets out the reasons for this.
“We have modern, flexible company law.
We typically have limited partnership
structures that tend to allow funds to pay dividends. We have a stable economic
environment. We have economic and
political and fiscal stability.
“There’s a lot of noise around tax and
offshore,” he continues. “But the reality is
that all these funds are structured through
[the Channel Islands] so that they simply
don’t pay additional tax. The investors and
the managers pay tax but the fund vehicle
itself isn’t taxed repeatedly on the same
investment.”

The islands’ law firms work closely with
corporate fund administrators to run the
funds once they’re set up and deployed in
projects around the world. Jersey-based
Hawksford is one of these firms, and it
also has operations in the Far East,
underlining the global nature of the
infrastructure funds business.
Hawksford Client Director Daniel
Hainsworth explains that his firm is
seeing increasing interest in infrastructure
investment from investors, including
high-net-worth individuals, in the Middle
East and Far East. He says the global
infrastructure market is growing apace.
“I was at an annual infrastructure
conference in Berlin recently and you can
see how it’s grown,” he says. “It started off
eight years ago with 20 people in a room talking about infrastructure. It’s turned
into an event now attracting between
3,000 and 4,000 attendees. If you look at
infrastructure as an asset, it’s an alternative
asset and one that’s becoming more
and more attractive from an investor’s
perspective, but also more required by
developing countries.”

He highlights renewable energy assets
in emerging markets that he believes will
attract greater asset allocation in the future
(see below). “This is a market that’s only
going in one direction, and that’s growing.”

Structure and the market

Although the market is booming, Carey
Olsen’s David Crosland strikes a more
cautious, practical note.
“There’s huge demand for infrastructure
investment and also huge investor interest
in infrastructure funds, but we need to
make sure they have the environment at
ground level to invest in infrastructure.
“It’s about certainty over the rule of
law and respect for assets. Public and
private capital has to have the means to be
channelled into infrastructure projects in various markets, and that’s what Jersey
and Guernsey do really well. The islands
have a key advantage over Europe now
in the establishment of these funds.”
Crosland also points to The International
Stock Exchange (TISE) – which is based
in Guernsey and where fund sponsors can
list debt – as another important tool.
“We’ve listed a lot of infrastructure
debt on TISE in the form, typically, of
bonds or loan notes,” he says. “You
need to have a variety of tools available
for infrastructure funding. What Jersey
and Guernsey do well is provide a lot of
options in a well-regulated, transparent
environment.”

Since the start of this year, however,
there’s been somewhat less deal activity,
according to Mourant Ozannes’ Darren
Bacon. “There have been fewer projects being acquired,” he says. “But that’s a
consequence of a lot of funds having been
raised already. People are trying to invest
that money at the moment and also a lot
of people are chasing the best deals, which
have become expensive.”
However, he sees it as a cyclical market
condition that will pick up again once
existing funds have been invested and new
fund raising accelerates again.
“From a Guernsey perspective, we’ll
continue the way we are,” says Bacon.
“We’ll just keep doing what we’re doing.
I’ve got no reason to think otherwise and
we’re seeing quite a lot of activity.
“And as we do more deals in North
America and Asia, there are options for
us beyond the UK and Europe, though the
relationship is, and always has been, close
with London as our nearest capital market.
This all looks positive for the islands.”

Infrastructure hot spots

When Basalt Infrastructure Partners closed
its second infrastructure equity fund in
February, it announced total investor
commitments of $1.28bn. Two of its four
investments will be in Detroit Renewable
Energy and a portfolio of solar energy
assets in Italy.
Renewable and sustainable energy
projects are a key trend that Daniel
Hainsworth, Client Director at Hawksford,
sees as ripe for growth. This embraces,
for example, solar and wind farms in the UK, Germany and elsewhere.
Meanwhile, although there’s aconsiderable demand from western
countries for injections of private capital
into infrastructure developments, in the
longer term, emerging markets offer huge
scope for infrastructure growth. Consequently, projects in Latin America,
Asia and Africa look attractive because they
offer western institutional investors scope for
portfolio diversification.

At the same time, they also attract Middle
Eastern, Far Eastern, African and Latin
American investors to invest in projects
in markets where they may have a good
handle on the geopolitical and economic
conditions that mark out the territory
where projects are located.
Looking forward, renewables and
emerging market infrastructure projects
are well starred for growth – particularly
because emerging markets have the
greatest need for infrastructure and often
lack the fossil fuels to power their growth.

Article originally published in BL Global, Issue 57. Words by Richard Willser. Download the PDF here

Your key contacts

Daniel Hainsworth

Head of Corporate Services, EMEA

Daniel has worked in the corporate and private wealth structuring industry for over 17 years and has wide experience in providing professional director and company secretarial services to a diverse range of clients.